To set the stage, the SBA reports there are 33 million small businesses in the USA. A small business is often defined as an independent business having fewer than 500 employees. Furthermore, the Baby Boomer generation currently in the age range of 60-78 years old account for approximately 41% of small business owners in the United States. It’s no surprise that an estimated 12 million small businesses will be sold in the next 10-15 years.
Planning for a business exit is a critical step for any business owner looking to ensure a smooth transition and maximize the value of their hard work. Whether you’re retiring, selling your business, or passing it on to the next generation, having a solid exit plan in place is essential.
In no particular order, let’s explore six tips to help navigate the complexities of business exit planning and ensure a smooth transition.
1. Start Exit Planning Early
The best time to start planning your business exit is well before you intend to leave. Ideally, you should begin the process at least three to five years in advance – likely when you aren’t even considering an exit. Early planning allows you to make strategic decisions that can enhance the value of your business, address potential issues, and ensure you have ample time to execute your plan effectively.
Another hidden benefit of early planning is preparing for the unexpected. Reins recently spoke with a client who found herself in a jam trying to exit her company in a hurry because her husband had a stroke. She scrambled to find a way to give her staff ownership so she could back out of her company duties (partially or fully), but the process lingered on and she remained in full control. The emergency of her husband coupled with full company duties left her extremely stressed and worn out because no contingency plan was in place.
2. Define Your Business Exit Goals
What do you want to achieve with your business exit? Are you looking to maximize financial gain, ensure the continuity of the business, or perhaps leave a legacy? Clearly defining your goals will guide your exit strategy and help you make informed decisions. Consider factors such as your financial needs, personal aspirations, and the future of your employees and customers.
3. Value Your Business Accurately
Understanding the true value of your business is crucial for a successful exit. Conduct a thorough business valuation to get an accurate picture of your company’s worth. This will help you set realistic expectations and negotiate effectively with potential buyers or successors.
Having a large gap between an ideal sale price and the assessed value of your company can be humbling at best and downright infuriating at worst. Assessing value early on and shoring the gap between expectations and actual value will put you in a better position to sell the business when you are ready. Consider hiring a professional appraiser or business broker to assist with this process.
4. Streamline Operations
A well-organized and efficient business is more attractive to potential buyers. Take the time to streamline your operations, reduce costs, and improve profitability. Ensure that your financial records are up-to-date and accurate, and address any outstanding legal or regulatory issues.
Offering phantom stock to key employees can be an excellent strategy to retain essential personnel during this period. Phantom stock provides key employees with a financial incentive tied to the future value of the company, encouraging them to stay and contribute to the business’s success.
The Reins MARE Stock plan has accelerated vesting schedules enabling you to issue stock to staff who stick around the company after the sale of your business for 6 or 12 months. This not only enhances the value of your business but also makes the transition smoother for the new owner. It’s a win for all involved: you (the seller), the buyer, and the key employees.
5. Assemble a Transition Team
Exiting a business is a complex process that requires expertise in various areas, including legal, financial, and operational aspects. Assemble a team of professionals who can guide you through each step of the process. This team may include an attorney, accountant, financial advisor, and business broker. Their combined expertise will help you navigate the intricacies of the exit process and avoid common pitfalls.
6. Communicate Effectively
Clear and transparent communication is vital during the business exit process. Keep your employees, customers, and key stakeholders informed about your plans and the timeline for the transition. Address any concerns they may have and provide reassurance about the future of the business. Effective communication can help maintain morale and ensure a smooth transition for everyone involved.
If you implement a MARE plan with your key employees, Reins will help keep them informed about what it is and the timing of their vesting schedules.
Conclusion
Business exit planning is a crucial aspect of entrepreneurship that requires careful consideration and strategic planning. By starting early, defining your goals, valuing your business accurately, streamlining operations, assembling a transition team, and communicating effectively, you can ensure a smooth and successful exit. Remember, the effort you put into planning your exit will pay off in the long run, allowing you to achieve your desired outcomes and leave a lasting legacy.
